How can I be confident corporate limited liability and aggregation of small investments into big piles of money would be possible without the state? Because contracts are possible without the state...
How would these contracts work to insulate passive investors from lawsuits against corporations? The contractual mechanisms necessary are already well known in business drafting. There are
indemnification clauses, whereby one party agrees to hold the other harmless and reimburse the other for expenses incurred in certain legal actions. Examples include warranty deeds in real-estate contracting, and guaranty agreements in lending: when Joe sells his little incorporated business, and Joe has personally guaranteed payment on loans associated with that business, the buyer of Joe's business will agree to indemnify Joe for anything Joe spends on the debts of that business after the business is sold.
Such clauses, whereby the business agrees never to hold its passive shareholders liable nor allow them to be sued without covering for them, would be relevant to tort creditors of the business — people who do not contract with the business voluntarily (e.g., someone who slips on a banana peel in the grocery store in which you own a few shares of stock).
Equally simple, and already in use in various types of contracting, are clauses that limit recourse of one party to the other party, used to protect passive investors from contract shareholders (lenders and vendors): when you or a business signs a contract with Corporation X, the contract will include a clause by which you agree to hold Corporation X, and only Corporation X and its officers and directors (and not those of its shareholders who do not participate in the daily management of the business) liable for any debts or contract breaches. Such conditions are already assumed when people contract with corporations, LLCs, and limited partnerships today.
How do we know that corporations would be provided for, and necessary, without the state? Entrepreneurs have already proven that anything people really need, they will pay for. Even with the presence of city police departments, private home-security firms have arisen and thrived around the nation. Even with a military and a defense budget that dwarfs that of the rest of the world, private providers of military services are arising in the United States. Garbage collection is now private for the majority of American garbage cans.
Did the king invent corporations? You might as well ask whether any kings were wily entrepreneurs who understood the business world better than businessmen. Few things government does were invented by government, and even those things government did invent would still be better provided privately than through forcible government. Remember also that government is made up only of individual human beings, and they are human beings who are employed by government — that is, they do not face the market pressures businessmen face, and as a result are generally less able than businessmen to regulate business activity intelligently.
The next time you encounter economically ignorant claims that corporations are mere creatures of the state, that they could not exist without state coercion and privilege, you know what to reply: no, they're not; yes, they could. Corporate obeisance to and dependence on the state today is a nonargument. Corporations today don't have a choice in the matter.
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http://mises.org/daily/2816
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